The reversible phosphorylation of proteins on tyrosine residues is fundamental to a variety of intracellular signaling pathways and is controlled by the actions of protein tyrosine kinases (PTKs) and protein tyrosine phosphatases (PTPs). While much progress has been made in understanding the regulation of PTKs, there is still relatively little known concerning the regulation of PTPs. Using immune complex phosphatase assays, we demonstrated that the enzymatic activity of the nonreceptor type PTP, PTP1B, is regulated by cell adhesion. Placing primary human foreskin fibroblasts (HFFs) in suspension leads to a distinct increase in PTP1B activity, whereas the readhesion of suspended HFFs onto fibronectin or collagen I inhibited activity. To gain insight into the mechanisms involved, we analyzed recombinant forms of PTP1B mutated at potential regulatory sites. Our results indicated that tyrosine residue 66 is essential for maintaining activity at 37 degrees C. We also found that the C-terminal region of PTP1B and localization to the endoplasmic reticulum are not required for the inhibition of activity by cell adhesion. However, analysis of PA-PTP1B, in which alanines are substituted for prolines 309 and 310, revealed an important role for these residues as the catalytic activity of this mutant did not decrease following readhesion onto collagen I. Since the binding of p130cas and Src to PTP1B is dependent upon these proline residues, we assayed the regulation of PTP1B in mouse embryo fibroblasts deficient in these proteins. We found that neither p130cas nor Src is required for the inhibition of PTP1B activity by adhesion to extracellular matrix proteins. Additionally, pretreatment with cytochalasin D did not prevent the reduction of PTP1B activity when cells adhered to collagen I, indicating that cell spreading is not required for this regulation. The control of the catalytic activity of PTP1B by cell adhesion demonstrated in this study is likely to have important implications for growth factor and insulin signaling.